Jose Dario Uribe, president of Colombia’s central bank, speaks at the Investing in Emerging and Developing Markets conference at Chatham House in London. The seven-member board, led by bank chief Jose Dario Uribe, raised the overnight interest rate by a quarter point to 5 percent today, as forecast by only one of 31 economists surveyed by Bloomberg.

Jose Dario Uribe, president of Colombia’s central bank, speaks at the Investing in Emerging and Developing Markets conference at Chatham House in London. The seven-member board, led by bank chief Jose Dario Uribe, raised the overnight interest rate by a quarter point to 5 percent today, as forecast by only one of 31 economists surveyed by Bloomberg. Photographer: Chris Ratcliffe/Bloomberg

Colombia’s central bank unexpectedly raised borrowing costs after the economy expanded at the fastest pace since 2006, defying President Juan Manuel Santos who said an increase wouldn’t be appropriate.

The seven-member board, led by bank chief Jose Dario Uribe, raised the overnight interest rate by a quarter point to 5 percent today, as forecast by only one of 31 economists surveyed by Bloomberg. Thirty analysts expected no change.

“The latest information suggests that in the fourth quarter, the Colombian economy continued to show strong momentum,” policy makers said in their statement. “Bank lending continued to show high rates of increases and consumer credit behavior suggests that households are significantly raising their level of leverage.”

Infrastructure projects and a wave of foreign investment in oil, coal and gold exploration in areas that were once overrun by guerrillas may keep economic growth near a five-year high, said economist Andres Langebaek. Gross domestic product expanded 7.7 percent in the third quarter from a year ago, leading the central bank to project growth of as much as 6 percent for 2011 overall.

“Third-quarter GDP growth was quite good and it appears the fourth quarter also will be, with public works as the main positive factor,” Langebaek, an analyst at Banco Davivienda SA in Bogota. A “light but concerning increase in inflation expectations” for 2012 would have also been a factor in any rate increase, he said.

Inflation Expectations

Uribe today said the bank expects the economy expanded 5.5 percent to 6 percent and will grow 4 percent to 6 percent in 2012. He said that the rate increase seeks to stabilize economic growth

The United Nations Economic Commission predicts the economy will grow 4.5 percent this year, more than the region’s 3.7 percent estimated average.

At the same time, the bank today noted that inflation expectations have increased. Inflation (COCPIYOY) ended 2011 at 3.73 percent, within the central bank’s target of 2 percent to 4 percent.

Prices will rise about 3.5 percent this year, according the median estimate of 35 economists in a January central bank survey, compared with 3.4 percent in December’s survey and 3.06 percent in May.

The central bank cited risks of a “disorderly adjustment” in European debt markets and signs that the domestic economy is slowing in its decision to leave interest rates unchanged last month.

Santos said last month it wouldn’t be “appropriate” for the bank to raise rates again at a time when other central banks are cutting them.

In a bid to ease gains in the currency, the central bank said Oct. 28 it will sell $200 million in dollar options whenever the peso’s 20-day moving average changes by more than 4 percent. No options have been auctioned since the announcement.

Speaking today at the central bank in Bogota, Finance Minister Juan Carlos Echeverry said the government won’t bring any dollars into the country for financing in 2012, and will also keep at least $1 billion of Ecopetrol dividends offshore — continuing a policy from last year — in a bid to keep the peso’s appreciation in check.

Additionally, the government will also keep $1.2 billion of royalty funds offshore, Echeverry said, adding that today’s rate increase was intended to keep the economy on “cruise speed.”

In the year to date, Colombia’s peso has rallied to trade at a three-month high against the dollar. On Jan. 27, the currency gained 0.2 percent to 1807.03 per dollar, its strongest closing level since Sept. 9’s end-of-day 1798.00. In trading today, it fell 0.5 percent to 1817.75.

To contact the reporters on this story: Blake Schmidt in Bogota at bschmidt16@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.